Nordion’s shares surged Tuesday after it announced the settlement of a longstanding legal battle with Atomic Energy of Canada Ltd. that will see both sides drop hundreds of millions of dollars in claims against each other.

On the Toronto Stock Exchange, the Ottawa-based nuclear medicine company’s shares gained more than seven per cent, rising 55 cents at $8.25.

Nordion said it will drop about $244-million of claims against AECL as part the settlement, which also includes a new supply agreement that will run until October 2016.

In addition, AECL will pay $15-million in cash to Nordion and drop about $127-million in claims it had sought – $47-million for arbitration costs and $80-million for damages.

“Nordion is now better positioned to focus on the needs and priorities of our business, including our important relationship with AECL, with a continued view to enhancing shareholder value and creating new opportunities for the company and our customers.”

The amended isotope supply agreement is a non-exclusive agreement for medical isotope supply by AECL to Nordion that can be terminated under several scenarios, including Nordion establishing an alternative supply or failing to purchase minimum quantities.

Another possibility is a permanent shutdown of AECL’s production facilities in Chalk River, Ont., 180 kilometres northwest of Ottawa, or force majeure for more than two years.

Ottawa-based Nordion – formerly part of the MDS group – is a global seller of medical isotopes that are used in cancer tests and treatment as well as medical imaging. It has some 450 employees in three locations.

There was a global shortage of medical isotopes when AECL’s NRU reactor – in operation since the late 1950s – was shut down in 2009 because of a leak that took more than a year to repair.

The shortage raised concerns by doctors and other health professionals about the availability of medical tests for Canadians. It also caused a political furor over the Harper government’s decision to permanently end the Maple program, an overbudget and behind-schedule plan to replace the NRU reactor.

Nordion said Tuesday that, under the new supply agreement with AECL, the cost of medical isotopes will continue to be determined based on a revenue sharing methodology. Starting next year, AECL’s share of revenues will increase, causing Nordion’s medical isotopes gross margin to fall by mid single digits.

AECL will also continue to provide Nordion with waste disposal services until Oct. 31, 2026.

Atomic Energy of Canada said the settlement reflects its planned exit from the production of the medical isotope molybdenum-99 using its National Research Universal reactor in 2016 and reducing financial risk for Canadian taxpayers.

“The settlement terms are well aligned with AECL’s domestic and international objectives and with our current restructuring process,” stated Dr. Robert Walker, AECL’s president and CEO in a separate release.

“We are pleased to have these disputes behind us, and we look forward to working with Nordion under our new commercial agreements.”

Douglas Miehm of RBC Dominion Securities called the legal settlement a “positive development” that exceeds his expectations.

“The settlement removes an overhang which could have been prolonged for an extended period with terms appearing favourable for both parties,” he wrote in a report.

Although it does little to recoup about $400-million paid for the mothballed Maple reactor, he said the deal is worth about $1 per share for Nordion, eliminates about $32-million in arbitration fees and ensures no further legal costs.

Still, he said Nordion’s isotope business continues to operate without a long-term supply agreement for molybdenum and the company is searching for a foreign supplier with few details on the potential liabilities.

“Having said this and more important in our view, the deal potentially frees up the company to go ahead and potentially sell the other businesses as the legal situation was an overhang.”

Last year, an arbitrator rejected Nordion’s three-year fight over AECL’s decision to mothball its Maple nuclear reactors. Nordion reacted by suspending its quarterly dividend and stop buying back shares on its stock buyback plan. Nordion originally sought $1.6-billion from AECL but warned after the arbitrator’s ruling that its claim may substantially decrease.

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